Merchant told radio station CJWW the judge essentially told him he should have sued the church instead of the government.
Merchant says he plans to appeal the decision.
The suit was filed by the Merchant Law Group on behalf of about 2,000 students who attended the Timber Bay residential school in Montreal Lake, Sask., between 1952 and 1994.
The plaintiffs claimed they were physically, sexually and emotionally abused.
The Timber Bay school is one of many across Canada the federal government does not recognize as a residential school.
As a result, its former students were left ineligible for compensation under the residential school settlement that awarded $1.9 billion to thousands of victims.